In answering the question “is lending more restrictive in 2024?”, the answer is twofold. Yes, many lenders – especially banks – have tightened credit requirements overall.
But what I’d like to talk about more are the restrictions that almost all banks use for business lending. I haven’t talked about these in a few years here, so 2024 seems like a good time to discuss them again.
Before I get into these restrictions, I need to state that these are restrictions that most business lenders and nearly all banks use. But some lenders do not, Crest Capital being one of them. In fact, it’s one of the major advantages we offer our clients. Forgive the commercial, but these restrictions are so impactful to your business that we need to point that out.
Ok, the main restrictions banks use are blanket liens, compensating balances, and annual requalifying. I’ll briefly discuss them below, and subsequent posts will discuss each individually.
- Blanket Liens – This is where the bank throws a lien over your entire company, which puts a lien on every single piece of equipment you own. So if you borrow money to buy a vehicle, the bank puts a lien on everything – tools, machines, other vehicles, office furniture, etc. Since they now have liens, you can’t sell any of it without an ok from the bank. Obviously, this isn’t optimal.
- Compensating Balances – The bank will want you to keep a minimum balance in an account with them. This minimum is usually 80% of the loan. So if you borrow $100k, you need to keep $80k on the sidelines in the bank, and not touch it. So… aren’t they kind of lending you your own money?
- Yearly Requalification – The bank will look at your finances every year. If they don’t like what they see, they can call in the loan immediately in full, even if you never missed a payment. And because of the previous two clauses – they have your money locked up and a lien on all your equipment – enforcing this is a breeze for them, and a nightmare for you.
It’s very important to be aware of these restrictions, as they are buried in the fine print, and are unlikely to be discussed with any great clarity or detail. But I’ll discuss them all in detail over the next few posts – stay tuned.